Strategic Management froman Islamic Perspective

Strategic Management froman Islamic Perspective

Text and Cases

Rodrigue FontaineKhaliq Ahmad

Copyright © 2013 by John Wiley & Sons Singapore Pte. Ltd.

Published by John Wiley & Sons Singapore Pte. Ltd.1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore 138628

All rights reserved.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted bylaw, without either the prior written permission of the Publisher, or authorization through payment of theappropriate photocopy fee to the Copyright Clearance Center. Requests for permission should be addressed to thePublisher, John Wiley & Sons Singapore Pte. Ltd., 1 Fusionopolis Walk, #07-01, Solaris South Tower, Singapore138628, tel: 65-6643-8000, fax: 65-6643-8008, e-mail: enquiry@wiley.com.

Limit of Liability/Disclaimer of Warranty: While the publisher, author and contributors have used their best effortsin preparing this book, they make no representations or warranties with respect to the accuracy or completeness ofthe contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a par-ticular purpose. No warranty may be created or extended by sales representatives or written sales materials. Theadvice and strategies contained herein may not be suitable for your situation. You should consult with a professionalwhere appropriate. Neither the publisher, authors or contributors shall be liable for any loss of profit or any othercommercial damages, including but not limited to special, incidental, consequential, or other damages.

Other Wiley Editorial OfficesJohn Wiley & Sons, 111 River Street, Hoboken, NJ 07030, USAJohn Wiley & Sons, The Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ , United KingdomJohn Wiley & Sons (Canada) Ltd., 5353 Dundas Street West, Suite 400, Toronto, Ontario, M9B 6HB, CanadaJohn Wiley & Sons Australia Ltd., 42 McDougall Street, Milton, Queensland 4064, AustraliaWiley-VCH, Boschstrasse 12, D-69469 Weinheim, Germany

Library of Congress Cataloging-in-Publication DataISBN 978-1-118-55305-3 (Hardcover)ISBN 978-1-118-55306-0 (ePDF)ISBN 978-1-118-55308-4 (ePub)

Typeset in 11pt, ArnoPro-Regular by MPSPrinted in Singapore by Markono Print Media Singapore

10 9 8 7 6 5 4 3 2 1

We would like to dedicate this book to all those who are trying tomake this world a better place.

Contents

Foreword xiii

Preface xv

Acknowledgments xvii

Part I Strategy: An Islamic Perspective 1

1 Introduction 3

Leading an Organization Is Like Driving a Car 4Critical Thinking 5The Problem with Conventional Management 6The Problem with Conventional Strategic Management 7The Value of Strategic Management from an Islamic Perspective 9References 11Notes 12

2 Conventional Strategic Management 13

Introduction 13The Importance of Competitive Advantage 13Competitive Advantage: A Means or an End? 15The Importance of Stakeholders 16The Strategic Management Process 17Strategic Management in Developing Countries 19Why Do Most Strategies Fail? 20

First Observation: Causal Ambiguity 24Second Observation: Strategic Thinking 24Third Observation: Profitability versus Risk 27Summary 28References 28Notes 30

3 Four Fundamental Problems 31

Introduction 31FP 1: The Use of Interest-Based Loans 31FP 2: Developing Sustainable Organizations 35FP 3: Overcoming Defensive Routines 43FP 4: Overcoming Conflicts of Interest 45Discussion 49Summary 51References 52Notes 54

4 Organizational Justice 55

Introduction 55Elements in Organizational Justice 56Hammer and Champy 60W. Edwards Deming 62Eli Goldratt 64Discussion 66Summary 70References 70Notes 72

5 Islam Transforms People and Leaders 73

Introduction 73The Individual as the Unit of Analysis 74Belief in Islam Appeals to the Intellect 80Islam in the Context of an Organization 82Islam in the Context of Multicultural Societies 83The Importance of Prayer 90The PIES Model 91The Driving Analogy 91Summary 92References 92Notes 94

6 The Challenge of Culture 95

Introduction 95The Link between Culture and Strategy 96Lessons from Research at the International Islamic University Malaysia 97The Role of Top Management 101

viii / Contents

Summary 106References 107Note 108

7 The Role of Islamic Law 109

Introduction 109Why Do We Need Islamic Law? 109Principles of Islamic Law 111The Importance of Intention and Knowledge 113Islamic Law for Top Management 114Islamic Law for Middle Management 115Islamic Law for Subordinates 116Shariah and Fiqh 117The Need for Further Research 118Summary 119References 119Notes 120

8 Strategic Decision Making 121

Introduction 121A Broader View of Strategy 124Strategy as Problem Solving 125Errors in Strategic Decision Making 126Defining the Strategic Problem 127Understanding the Strategic Problem 128Experimenting 131Strategic Decision Making 132Evaluating the Strategic Process 134Summary 135References 137Notes 139

9 Analyzing a Case 141

The Purpose of Analyzing a Case 141Choosing the Story 148

Part II Case Studies 151

Cases in This Textbook 151Note 154

10 Case 1: IBM and Lou Gerstner 155

Introduction 155The Beginning 155The Writing on the Wall 156Finding a New CEO 157The First Days at IBM 157

Contents / ix

The Corporate Culture Problem 159Do We Need a Strategic Vision? 160Getting the Execution Right 161The Essence of Leadership 161Reviving the Brand 162Compensation 162Making the Company Grow Again 163References 164

11 Case 2: Al Rajhi Bank 165

The Job Offer 165Al Rajhi’s Background 166Bilal’s Conclusions 172

12 Case 3: Bank Muamalat 173

Zabeda’s Report 173The Beginning of Bank Muamalat 173Top Management Structure 174The Financial Performance 175Putting IT to Work 176The Competitive Environment 177Zabeda’s Supervisor’s Comments 179References 180

13 Case 4: Bank Rakyat 181

The Strategic Challenge 181The Cooperative Movement 181Bank Rakyat 182Marketing at Bank Rakyat 183Putting IT to Work 184Future Plans 185References 185Note 186

14 Case 5: MUSLEH (Part 1) 187

The Dilemma 187MUSLEH 187The Founding of MUSLEH 188The Personality of Ustaz Amin 189The Classical Strategic Management Framework 189Connections with Other Professionals 191Setting a New Direction for the Group 192Note 192

x / Contents

15 Case 6: MUSLEH (Part 2) 193

Introduction 193Changes in the Middle East 193Dr. Tareq Al Suwaidan 194Dr. Amr Khaled 196The Debate 196A Trip to Kuwait City 197What to Do Next? 198

16 Case 7: Fuji Xerox 201

The Phone Call 201An Overview of Fuji Xerox 202Fuji’s Emphasis on CSR and Sustainability 202Fuji’s Marketing Initiatives 205A SWOT Analysis of Fuji Strategy 206An Analysis of Fuji’s Financial Results 207Conclusion 208

17 Case 8: McDonald’s Pakistan 209

The Dilemma 209The Company Profile 210Raza Ali 211Rashid Ibrahim 211McCafé 212McDonald’s Target Market 213The Main Competitor: Gloria Jean’s Coffees 213Back to the Dilemma 214

18 Case 9: Unilever Bangladesh 215

The Appointment 215Bangladesh 215Industry Factors 216Industry Players 217The Organization’s Structure 220Financial Management 221Marketing Management 221UBL Products 222Brand Promotion 222Pricing 223Operations Management 223Human Resources Management 223Conculsion 224Notes 224

Contents / xi

Appendix: A Primer on Evolution 225

About the Authors 231

About the Contributors 233

Index 235

xii / Contents

Foreword

The world is crisis prone. A crisis of one kind or another continues to confront countries,regions, and the whole world. Often, a crisis emanating in one corner of the globe can becomepervasive, whether it is induced by environmental disorders or sociopolitical upheavals.

Businesses operate within the ecosystem of environment, society, and governments andthe bilateral or multilateral trade and investment relationships between countries and regions.From this perspective, the ability to perceive changes and, more important, to align a businesswith impending changes and to face challenges is imperative. Business leaders, who havesteered their firms and organizations to success, have consistently shown their acumen andprowess in making strategic decisions that are important for the future of an organization.

The future is not a set of constant variables. It is fraught with ever-changing parameters.It is dynamic and prone to risks that can be extraneous. This is one reason that strategicmanagement is focused on in business studies and management practices. The conventionalapproach to discussing strategic issues from a purely traditional business–based perspectiveis fast changing. Stakeholder issues hitherto considered as external to business, such asenvironment, social justice, governance, transparency, and ethical concerns, are now an integralpart of critical thinking and affect a firm’s strategic business as well as its survival in the long run.

The authors havemade a pioneering and bold attempt to look at strategic management issuesfroman Islamic perspective. This is awelcome initiative as their efforts bring a fresh approach to thecontinuing discussionon strategicmanagement. Apart fromaddressing the issues fromapedagogicpoint of view, the authors have presented data and case studies contributed by experts and obtainedfrom their research. This approach helps to illustrate the application of some of the principles ofstrategic management from an Islamic perspective.

In this regard, the authors have attempted to include Islamic values into the discussion.This, in my view, is a welcome contribution to the ongoing debate on sustainability issues thatdominates business strategy nowadays. The intention of the authors to imbue Islamic practicalwisdom in formulating strategies and plans is commendable.

The book achieves its objective to be an introductory text for graduate students andothers who are interested in the subject.

Datuk Seri Mohamed IqbalChairman, Malaysian Institute of Management

Kuala Lumpur, Malaysia

xiv / Foreword

Preface

This book is based on a simple premise of humanism. This world would be a better place ifbusiness strategists applied Islamic principles when developing their strategic plans. With thisbook, we would like to propose a methodology for strategic management from an Islamicperspective. We have taken the best ideas of both Western strategic management knowledgeand Japanese strategic management knowledge and have tried to integrate East and West withthe practical wisdom of Islamic principles.

Several years ago, the idea that any religion—let alone Islam—could help us managethings better would have been unthinkable. However, with all the corporate scandals that haveplagued the world over the past 15 years, people are realizing that it might be a good thing ifstrategists had a greater sense of morality.

The editors of the Journal of Management Development went a step further. They publisheda special issue on “Practical Wisdom in Management from the Religious and PhilosophicalTraditions” in 2012. They wrote that “the pursuit of superior knowledge without the pursuit ofpractical wisdom is incomplete and can cause great damage.” The editors observe that “theproject of enlightenment can be considered incomplete and rudderless without a re-con-nection to the practical wisdom from religious, spiritual and philosophical traditions.”We concur. For years, experts at the International Islamic University Malaysia have knownthat the development of strategic management has been lopsided. It is only recently thatother experts in the field are looking at merging the classical approach (normally very ana-lytical) with principles and values from other disciplines and other cultures. In particular,scholars around the world are rediscovering the role of religion in providing leaders with a

moral compass that seems to be lacking at the moment. We believe that this emerging trend isboth exciting and refreshing and we hope to contribute to this trend with our book, StrategicManagement from an Islamic Perspective.

For 30 years, the International Islamic University Malaysia has argued for a greaterintegration of “secular” and “religious” knowledge based on revelations and reasons, arguingthat both are necessary. More recently, the university endorsed the concept of al Wasatiyyah,which reflects the concerns that Islam has for justice, excellence, balance, and strength. Withinthis context, the faculty (kulliyyah) of economics and management sciences (KENMS) hasbeen working on the Islamization of management for more than three decades. We see thisproject as an inclusive one that can benefit everybody, not necessarily only Muslims.

AudienceThe main audience for this book is university students taking strategic management courses.However, we have written this book in a way that we hope will also benefit senior academicsand practitioners.

Overview of the ContentsThis book is divided into two parts. The first part looks at the theory of strategic managementfrom an Islamic perspective. We start with an introduction (Chapter 1), a review of theliterature (Chapter 2), and the identification of four key problems (Chapter 3). We then seehow Islam provides solutions by exploring the concept of organizational justice (Chapter 4),the transformational nature of faith (Chapter 5), and the ability to develop an Islamic cor-porate culture (Chapter 6). Lastly, we discuss the role of Islamic law (Chapter 7) and we finishwith strategic decision making (Chapter 8). Part II includes a number of case studies that allowstudents to develop their analytical skills and the ability to propose new strategies.

Additional MaterialsInstructors can find PowerPoint slides of course outlines and instructor manuals for eachchapter at www.wiley.com/go/strategicmanagement.

xvi / Preface

Acknowledgments

This book was written by both of us, but it reflects the collective intellectual effort of many otherexperts inmanagement, marketing, economics, accounting, and finance.Wewould like to extendour thanks to some of our colleagues who helped us: Mohamed Sulaiman, Mohd Aslam Hanif,AahadOsman-Gani, Syed Ismail Ahmad, Arif Hassan, JunaidahHashim,MohdMustaphaOmar,Abdul Gapur, Saim Kadiyabi, Ahmad Kameel Mydin Meera, Mohd. Suhaimi, Nor Hazilah, andNaail Kamil among others. Our thanks extend to our colleagues in other universities around theworld: Rafik Beekun, Jamal Badawi, Azhar Kazmi, Shamim Ahmad, S. M. Imamul Haque, AbbasAli,MuhammadKashif Saeed, and Shamas-ur-RehmanToor.Wewould like to thank some of thepractitioners we have met on our journey: Dr. Tariq Al-Suwaidan, Ustaz Megat Amin, SaptoSugiharto, Darwish Moawad, Mohd Adam Mohd Said, Mansor Awang, Hakimi Yakoob, MohdShukri Mohd Yunus, and, of course, Fazrul Ismail. You showed us that strategic managementfrom an Islamic perspective is not simply an academic dream, but it is something that is currentlybeing practiced. Special thanks go to Patrick Fontaine, whose insights into leadership andstrategy reflect a lifetime of practice in Africa, theMiddle East, Europe, and theUnited States.Wewould like to thank the university’s Research Management Centre (RMC) for its financialsupport and Diaa Al Juneidi for his help in organizing the trip to Kuwait and Dr. Al-Suwaidan’svisit to the university. Last, we would like to thank our students and our families—without you,we wouldn’t be here.

Rodrigue Fontaine and Khaliq AhmadKuala Lumpur

Malaysia

PART

I

Strategy: An Islamic Perspective

The objectives of this part are to:

1. Clarify the methodology of strategic management from an Islamic perspective.2. Offer an introductory text to students, academics, and practitioners interested in strategic

management from an Islamic perspective.3. Present some of the data collected by Muslim researchers.

The literature reviewed in the area of strategic management will not be exhaustive, andtherefore it might frustrate people wanting a more advanced text. The presentation of thematerial reflects our personal experiences in teaching strategic management over the years andmay differ from other texts.

CHAPTER

1

Introduction

For more than 20 years now, experts in management at the International Islamic UniversityMalaysia (IIUM) have been working on management from an Islamic perspective (MIP).Recent books in the area of MIP include Ahmad, Islam, and Ismail (2011), Ahmad andFontaine (2011), and Osman-Gani and Sarif (2011). Over the years, some researchers havespecialized in some of the subbranches of Islamic management. Some have developed aninterest in organizational behavior, others in business ethics, and yet others in strategicmanagement. The focus of this textbook1 is on strategic management from an Islamicperspective. The mention of “strategic management from an Islamic perspective” raisesthree questions:

1. What is the Islamic perspective on strategic management?2. Does strategic management from an Islamic perspective add anything new to strategic

management?3. Do organizations today apply strategic management from an Islamic perspective?

Part I will deal with the first two questions. Part II will address the last question byproviding examples of organizations applying the principles of strategic management from anIslamic perspective.

Leading an Organization Is LikeDriving a Car

In different parts of this text, we will use the analogy that leading an organization is like drivinga car. The driver (leader of the organization) needs to decide where to go (vision), how to getthere (strategy), and at what speed to drive (risk and profitability). To achieve his or her goal,the driver needs to avoid hitting other cars (competitors) while obeying the rules of the road(government regulations). The driver (leader) has a number of passengers in the car(stakeholders).

In conventional strategic management, the measure of success is speed (profitability).Passengers (stakeholders) may not have a comfortable ride and some of them might bepushed out of the vehicle in order to arrive at the destination faster.

In strategic management from an Islamic perspective, the measure of success isstriving for justice (organizational justice will be defined later). Generally, this is done bydriving safely (reduced risk) although a reasonable speed (profitability) is necessary toarrive at the final destination within a reasonable time frame. The driver (leader) has amoral duty to ensure the rights of all passengers (stakeholders). At the same time, thepassengers have a moral duty to speak to the driver to help him drive the vehicle safely.This is because they have different views of the situation that may be important to thesafety of all. Everybody agrees that none of the stakeholders ought to be sacrificed for thesake of arriving at the destination more quickly.

We realize that this analogy is far from perfect. Later, we will modify it slightly by arguingthat rather than driving one car, it is more like leading a convoy of buses (after all, manyorganizations have thousands of employees). If an organization has 5,000 employees and weassume that there are about 50 people in one bus, the leader has to coordinate the movementof about 100 buses. Nonetheless, we hope that this analogy gets two basic messages across:

1. The protection of the rights of all stakeholders is a shared moral duty. Although rules andregulations are important, a collective feeling of accountability toward God is necessary togive the passengers the courage to speak up (this statement will become clearer as thebook progresses).

2. The Islamic perspective on strategic management is visionary and more than simply a“moral version” of strategic management. A key theme is that conventional strategiesfail because many drivers take ridiculous risks. However, the short-term rewards oftaking ridiculous risks are such that many leaders are encouraged to feel that they are“better than the rest”—until the organization goes bankrupt. The need toachieve organizational goals while reducing risk is something we hope to explore insome detail.

4 / STRATEGIC MANAGEMENT FROM AN ISLAMIC PERSPECTIVE

Critical ThinkingTo be successful in business today, one must possess critical thinking skills. Critical thinkingrefers to the art and science of evaluating claims, statements, and evidences. Critical thinkingoften requires people to think carefully about assumptions that are being made. In the contextof this work, we would argue that critical thinkers need to think very carefully about existingparadigms and where we find them. In our literature review, we will discuss the fact that thestrategy literature is confusing because of the overlap between strategy and planning. Fur-thermore, some of the best ideas related to strategy are not necessarily found in the field ofstrategic management but rather are found in other academic fields. In regard to readingstrategic management textbooks, there can be two approaches.

The first approach is to assume that the existing theories found in the majority of strategicmanagement textbooks are correct. After all, if these theories are in a textbook, they must betrue. In that case, any new strategic management textbook that is different from the majority issuspect and cannot be trusted.

The second approach to assume that the existing theories found in the majority of stra-tegic management textbooks need improvement. New research is needed to improveon existing theories. In that case, new textbooks that are different from the majorityshould be welcomed because they introduce new ideas. Mackenzie and Afzalur Rahim (2003,p. 315) explain,

Strong inference is basically a simple idea. Look for an empirical counter-exampleto a theory, accept the conclusion that a theory will always need improving andmake the improvement. Strong inference is based on the robust conclusion thateventually all theories are proven wrong or in need of a restatement. It makes moresense on working on improving the theory than in trying to justify it. The best wayto improve a theory is to find out where it breaks down. That flaw will then lead toa revised version of the theory.

We have written this textbook with this second approach in mind. As authors, we tend tolook for the counterexamples that contradict existing theories of strategic management. Wehave started with a premise that might be controversial for some readers, namely that there isenough practical wisdom in the Islamic tradition that allows us to propose some new ideasabout strategic management.

At the same time, we do not intend to simply repeat what other Muslim scholars ofstrategic management have talked about. In fact, in writing this text, we have ended up quotingonly a few Muslim scholars. We have done this to make the text easy to read and to provide aseamless flow in the ideas.2 We believe that our approach is consistent with the Qur’anicinjuction to think deeply and to continuously improve. Badi and Tajdin (2005) note that theQur’an uses the following words extensively:

CHAPTER 1: Introduction / 5

• Tafakkur (the process of reflecting)• Nazar (to consider)• Tabassur (to gain insight)• Tadabbur (to ponder)• Tafaqquah (to fully understand)• Tadhakkur (to take heart—when you think about verses of the Qur’an that apply to you)• I’tibar (to learn from the experience of others)• Ta’aqqul (to use one’s mind in the right way)• Tawassum (to reflect)

This textbook reflects our collective effort, which seems to encompass all of theseconcepts.

The Problem with ConventionalManagement

Economist Paul Ormerod recently observed that more than 10 percent of all companies inthe United States disappear each year (Ormerod, 2007). He argues that many businessleaders think that they are able to control events but, in reality, they are far less in controlthan they think. Successful organizations are those that plan, but at the same time they areflexible enough to alter their plans when things do not turn out as they had planned. Otherexperts have, on the whole, confirmed that things rarely go according to plan. Bohn (2000)found that many organizations are in a constant state of “fire-fighting” as employees come upwith ineffective solutions to customers’ problems. Nutt (2004) found that managers inorganizations have a 50 percent success rate when it comes to making decisions, which isequivalent to flipping a coin. Beer and Nohria (2000) report that 70 percent of changeinitiatives in organizations fail. Deming (1994) reports that 95 percent of changes madeby management make no improvement. Starkey, Tempest, and McKinlay (2004) show that62 percent of businesses in the United States do not survive after five years; 80 percent donot survive 10 years; and 90 percent do not make it beyond 20 years. Haswell and Holmes(1989) observe that studies show different failure rates for different industries. To makethings worse, different experts have different ways of defining failure, but everybody agreesthat the failure rate is generally high. Observers point out that failure not only affects smallcompanies with limited resources, but it also affects large companies with almost unlimitedresources. Those companies that do survive often show poor results before their failure.Coveney, Ganster, Hartlen, and King (2003, p. 20) write, “More than 25% of the top 100U.S. companies that survived in 2001 lost at least 66% of their market capitlisation.” In short,organizational failure is the norm, and organizational success is the exception.

6 / STRATEGIC MANAGEMENT FROM AN ISLAMIC PERSPECTIVE